Monday, May 12, 2008

The Psychology of the Upcoming Week's Earnings and Economic Data

Good Morning and Good Evening to our readers around the globe!

Last week's most notable events were: 1) crude oil closing above $125.00/barrel, and 2) the S&P failing to hold the 1,400 support level, closing 12 points below at 1,388. Three weeks ago, Psychology of the Call team (POTC) did predict crude would be a good short trade from $120-$130 and it has in fact climbed to that target area. Only aggressive portfolios with tight stops should trade what we feel is a crude spike/bubble. The 1,400 S&P breach is more worrisome and must be monitored. POTC's bullishness will be dampened if the S&P fails to close above 1,400 on Friday, May 16th.



Another problem for stocks is the 10-Year Treasury Note. The second attempt to clear 3.9% failed on this 3 month chart, so now a close below 3.65% would be a bullish signal for bonds and a bearish signal for stocks.

Wise stock traders look to the bond market for directional swings as it is many times more liquid, larger and safer than the stock market, so please set up trades accordingly; the more arrows in the quiver, the better. The appetite for bonds is increasing again and that means lower bond yields and lower stock prices, as May money flees to safer springs, so exhibit caution. If the 10 Year Note pulls back under 3.65% this week, most stock bulls will be bloodied...

Jim Cramer has agreed with the argument we have been making for over one month now that the Euro-dollar will act as a fire starter. "Sell in May and go away" could create terrific long entry points, especially for solid blue chips like Goldman Sachs (GS), Genentech (DNA), First Solar (FSLR) and Joy Global (JOYG). Although Jim Cramer only mentioned a few stocks, such as Deutsche Telekom's (DT) interest in buying Sprint Corp. (S), POTC feels this trend will only evolve and turn into a theme by the time the leaves turn color and "Fall." Additionally, we continue to predict Euro-dollar buying U.S. prime urban real estate and high end coastal locations in Florida and Southern California. That said, we urge caution with most long positions this week as we predict the S&P closes below 1,388 on Friday, May 16th, although there will be plenty of volatility and opportunities to profit!

Please keep two things in mind for the week ahead: 1) Options on stocks expire Friday, so expect greater volatility than in the last several weeks, and; 2) The CNBC Million Dollar Challenge begins Monday, May 12th. Remember you can have up to five accounts, so perhaps a wise move would be to make one "King of Cash" for the first few days or perhaps the entire week, as shorting is not allowed and the S&P has broken 1,400. There is a currency component this year which allows for "pair trading", i.e. EUR/USD or USD/JPY. This component limits 10%/$100,000 of the total $1M portfolio at the outset. Also, short selling of the "currency pairs" is allowed. With a little psychology and a lot of luck, we will be rooting for one of our readers to win the Million, cheers!

http://contests.cnbc.com/milliondollar/main.do

Monday, May 12th will bring us no market moving economic data. So the order of the day will be influenced by Friday's weak market and S&P breach of 1,400. Earnings before market come from S. Although the earnings will not be market moving plus or minus a couple cents of where the analysts have them pegged, the psychology surely may. There have been two rumors floating around recently: 1) DT is interested in buying S (the Euro-dollar fire starter theme), or; 2) S may "divorsify" themselves from their failed Nextel marriage.

http://news.moneycentral.msn.com/ticker/article.aspx?symbol=US:DT&feed=AP&date=20080509&id=8620817

Note: POTC gives credit to legendary investor Peter Lynch for the word "divorsify", as well as a lot of the psychology we serve up. Peter Lynch was one spectacular educator and investor. Now, will S reveal a longer term market moving plan of either of the two above mentioned scenarios? We sure hope so, as the stock market needs a catalyst after last week's dismal performance.

Tuesday, May 13th at 8:30 ET brings us Retail Sales Data for the month of April.

http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/retail.htm

The psychology and market activity after the Retail Sales number will not be positive in our opinion because of the explosion of crude oil/gas prices. Even though building materials may improve over March's -1.6, the consumer looks to be pinched by the recent spike in energy prices. The Airline and Trucking sectors have been trapped under ice of late and we don't see any signs of instant relief. Are you old enough to remember the days of the trusted railroad system? Perhaps railroads will be utilized again; today's trucks could become extinct with diesel fuel breaking $4.00/gallon for the first time in history. The market always looks forward, granted, but the realization is the market has never been in this kind of predicament before. POTC has stated before that high energy prices are good for part of the market, and we stand by that thesis. There are many individuals and corporations profiting from high energy prices, and new burgeoning sectors are evolving. Companies like First Solar (FSLR) could be a safe haven for our readers if the price of crude remains above $100/barrel through 2008.

We would not recommend many sectors in this environment of falling home prices coupled with spiking inflation in food and energy. Quick Psychological Financial Fusion: Congress is considering changing the make up of the copper penny to reflect more steel. Perhaps considering a steel stock like Nucor Corp. (NUE) makes good sense as pennies go from copper to steel: http://www.nucor.com/ POTC will be monitoring Congress closely over the next several weeks and if this legislation passes steel stocks like NUE will spike. Stock option traders take note!In 1943, due to wartime copper shortages, the U.S. mint struck steel pennies: http://en.wikipedia.org/wiki/1943_steel_cent

After market earnings come from Applied Materials (AMAT) $.21 estimate, and Electronic Arts Inc. (ERTS) (minus $.11 estimate). Quick Psychology: for purposes of the aggressive CNBC Million Dollar Challenge: we recommend buying ERTS over AMAT, as the negative sentiment in that minus $.11 estimate has a better chance of rewarding on the upside.

Wednesday, May 14th at 8:30 ET brings us the Consumer Price Index (CPI) for April.

http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/cpi.htm

POTC believes the core CPI cannot be taken as seriously as in the past. Food and energy prices have done more than simply break out of a cycle. Crude Inventories are released at 10:30 ET for the week ending May 10th. Will the rise continue indefinitely? Of course not, but even if the price of gas stabilizes in the $3.69 range, or crude oil in the $110.00 range, it will have negative consequences on consumer psychology in the short run, therefore the 1,400 S&P level is something every investor should monitor closely this week as the Index is the best forward-looking indicator we have. If energy and food prices don't pull back sharply soon, mid end/cost clothing retailers will be hit hardest and the lower end/cost stores like Wal-Mart (WMT) will fare best. Regardless of the overall CPI number, the fact it is approaching its 3 year high of 4.7% and talk of 5% around the corner will wake up many bears on Wednesday. The CPI data will not have bullish effects on the market in our opinion. The current CPI year over year (y/y) stands at 4.0% A word of caution… this number does not reflect last month’s run up in energy. Any votes for higher CPI numbers still ahead?

Before market earnings come from Deere & Company (DE) $1.75/share estimate, and Freddie Mac (FRE) -$1.05/share estimate; this is a great example of why we mention the phrase "market of stocks" and not merely use "stock market" like the broad S&P Index, especially during earnings season. DE could see much higher prices ahead as the market for their U.S. dollar denominated machinery is red hot, and FRE's struggle in the low to mid $20's could continue for years in this credit/mortgage debacle. If we had to pick stocks that can avoid the inflation slaughter ahead, besides biotechnology stocks like Genentech (DNA), we would favor FSLR and DE.

Thursday, May 15th at 8:30 ET, Initial Claims for Unemployment will be released for the week ending May 10th. Unemployment is coming in at elevated levels, but still below levels seen in the past two recessions. IF this weekly claim number comes in below 350K the bulls will run, and if it comes in above 375K the bears will feast, so pay close attention. Anything in between will be a wash and look more to the manufacturing data. Weekly claims in the 2001 recession spiked over 400K; now it stands at 365K. Some economists believe monthly unemployment claims must jump by 150K in order for a real recession to be called. We haven’t seen that yet and hopefully never will. The silver lining of continued high energy prices is research and development (R&D). High oil prices will kick start more aggressive science and technologies like solar, wind, and countless others not even mentioned by the general media as yet. So there are those who want high energy prices so that the paradigm shift to alternative energy will occur more quickly. POTC believes the paradigm shift to alternative sources of energy will occur even when crude oil pulls back under $100/barrel so we prefer to have energy and food prices fall, giving instant relief to consumers around the world.

The NY Empire Index for May comes at 8:30 ET and the Philadelphia manufacturing data comes at 10:00 ET. You would be wise to wait for the larger gauge of manufacturing data slated for release at 9:15 ET (Capacity Utilization) before putting all your chips on the line. http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/indprd.htm

The Capacity Utilization number takes the temperature of the U.S. factories, utilities, and mines. MINES and MINING may be the key words that ignite the market bulls come Thursday. Perhaps a company like Joy Global (JOYG) will do well this week.

Even inflationary environments have sectors that outperform. The mining sector is a silver lining that is included in the Capacity Utilization data, so if the week has in fact been bearish Thursday's before market release of Capacity Utilization could reverse that sentiment and fire start the S&P Index above last week’s close of 1,388, so set up trades accordingly. Regardless of earnings and/or economic data, we always obey the 11 Commandments. Earnings before market open come from J.C. Penney Company (JCP) estimate $.50, and after market from Hewlett Packard (HPQ) estimate at $.84. POTC is not optimistic about either report. Perhaps Intel Inc. (INTC) execs gave HPQ's bad quarter away on their CC we wrote up in detail 3 weeks ago. Go back and read how the INTC executives literally bashed HPQ and DELL!

http://psychologyofthecall.blogspot.com/2008/04/psychology-of-intel-inc-intc-q1-2008.html

DELL is one of the stocks we continue to short. Perhaps HPQ's chart scared us from going short, although we urge our readers to listen or read how adamant INTC execs were about taking either HPQ or DELL to school, obviously winning market share away from them. POTC feels DELL and HPQ are both in trouble, but especially DELL.

Friday, May 16th is the fall out after the positive Capacity Utilization data mixed together with HPQ's poor report after the market close. IF HPQ reacts positively, bears will get trampled on this option expiration day, but we don't see that happening. POTC sees Thursday being a head fake move up, and Friday will be blood letting. There is some economic data being released Friday: Housing Starts and Housing Permits, but neither will be market moving at 8:30 ET. Michigan Consumer Sentiment will be the final nail in the bull coffin at 10:00 ET.

http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/mich.htm

POTC does not believe consumer sentiment and psychology has improved, and since the respected economists at Briefing.com have the May sentiment improving over April's, we do not believe the market has discounted a bad number. If we are right, the Friday sell off will be brutal and deep. If the Michigan Consumer sentiment comes in above 65, bulls will cheer, if it comes in below 62, the sea of red tape will be evident and a bloody close well below 1,388 will be in store. Perhaps our readers will start believing that the cliché "sell in May and go away" still relates as we see the S&P closing below 1,360.

Please remember to enter the CNBC Million Dollar Challenge. May your week be filled with good profit, great health, much excitement and fantasy. Remember to use psychology to your advantage and obey the 11 Commandments. Finally, we want to thank you for letting us be ourselves… again.

The Psychology of the Call team.

7 comments:

Anonymous said...

The steel penny trade is interesting, didn't know, thanks.

Anonymous said...

Isn't any Friday for options expiration normally a down day? I don't get why it should be worse than usual?

Anonymous said...

Why mines?

Anonymous said...

The week of option expiration is marked by greater volatility than anything else. S&P usually ends up or down a bigger percentage than the preceding three weeks. We feel crude closing above $125 will weigh negatively on the consumer and most corporations, as transport costs must be passed on. Oil at $100 a few weeks ago looked like a 'walk in the park' compared to $125, yes?

Anonymous said...

Mines... because the surge in hard commodities is creating great profits and jobs for the mining industry. Gold, copper, zinc, nickel, and iron ore will continue to be demanded on a greater global scale. Consider JOYG as a core holding, as they don't have to reinvent themselves like the MSFT's and DELL's of the world.
Here's the steel penny story:
http://money.cnn.com/2008/05/07/news/economy/steel_pennies.ap/index.htm
Thanks for the Q

Anonymous said...

All right, that sounds like it might work out. Thnx for the info.

Anonymous said...

HPQ did blow up, good call.